Budget talks stall over income, estate taxes as Jan. 1 nears

With little more than a day remaining to avert tax increases for almost every U.S. worker and to halt federal spending cuts, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell worked to bridge gaps over income tax rates, the estate tax and other issues.

“There’s still significant differences between the two sides but negotiations continue,” Reid, a Nevada Democrat, said on the Senate floor today (Dec. 30. The Senate will resume its session tomorrow (Dec. 31) at 11 a.m. Washington time and “perhaps” have further announcements then, he said. “I certainly hope so.”

If Congress does nothing, taxes will rise in 2013 by an average of $3,446 for U.S. households, according to the nonpartisan Tax Policy Center in Washington.

Tax filing for as many as two-thirds of U.S. taxpayers could be delayed into at least late March. Defense spending would be cut, and the economy would probably enter a recession in the first half of 2013, according to the Congressional Budget Office.

The effects of the higher tax rates and federal spending cuts would accumulate over a matter of months. Congress could reverse them by acting retroactively in 2013. The current state of talks isn’t necessarily ominous, said Senator Olympia Snowe of Maine, a Republican.

“The one thing Congress is predictable about, and that is waiting until the very last hour, and maybe it is going to be the eleventh hour,” she said. “We got one more day.”

McConnell, a Kentucky Republican, reached out to Vice President Joe Biden in an effort to break the impasse.

Congress is working to avert more than $600 billion in tax increases and federal spending cuts, the so-called fiscal cliff, set to start taking effect in two days. The House and Senate held an unusual Sunday session after President Barack Obama on Dec. 28 asked Reid and McConnell to try to find a solution. Both houses adjourned by mid-evening and will resume tomorrow.

“The sticking point appears to be a willingness or interest or frankly, the courage to close the deal,” McConnell said on the Senate floor. “I’m willing to get this done, but I need a dance partner.”

Illinois Senator Dick Durbin, the second-ranking Democrat, said unresolved issues include the income threshold at which tax rates would rise, expiring estate tax levels and how to prevent an expansion of the alternative-minimum tax.

Durbin also said there is a debate over raising the rate for capital gains and dividends from 15% to 20%. The issue is at what income level the rate would jump to the higher percentage, he said.

Regarding talks between McConnell and Biden, Reid said, “I wish them well.” Biden was at the White House, according to an administration official who spoke on condition of anonymity.

During an interview broadcast earlier today on NBC’s “Meet the Press,” Obama made a last-minute appeal for compromise and warned of “an adverse reaction in the markets” if Congress doesn’t act.

Republicans “say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” Obama said. He said his offers to Republicans have been “so fair that a lot of Democrats get mad at me.”

In a statement, House Speaker John Boehner, an Ohio Republican, called Obama’s comments “ironic, as a recurring theme of our negotiations was his unwillingness to agree to anything that would require him to stand up to his own party.”

Several Senate Republicans leaving a caucus meeting said McConnell told them the talks stalled because Obama insists on using revenue generated from higher tax rates on the wealthy to reduce the spending cuts scheduled to begin in January.

Senator Bob Corker, a Tennessee Republican, said new revenue should go instead to deficit reduction. Democrats “want to spend it all now,” he said.

Democrats have said for more than a year that new revenue should be used to turn off the spending cuts. That was the basis of their proposals in failed talks by a deficit-reduction supercommittee.

Senator John McCain of Arizona said his fellow Republicans would stop insisting on using a new inflation measure that would lead to smaller Social Security cost-of- living increases.

Reid said earlier today that Democrats wouldn’t agree to use the new inflation measure as part of a short-term deal. He said he would keep trying to come up with an offer to Republicans.

The setback over Social Security followed 24 hours of progress toward a deal, according to a Democratic aide familiar with the talks. During the previous two days, Reid and McConnell had been closing in on agreement on a threshold for letting income tax rates increase for top earners and narrowing differences over the estate tax, the aide said.

Republicans and Democrats agree that George W. Bush-era income tax cuts should be extended for the vast majority of taxpayers. Obama and other Democrats want to let the tax cuts expire for the top 2%, or married couples earning more than $250,000 a year. Republicans oppose higher tax rates for any income level.

In the event the Senate can’t reach a compromise, Obama has asked Reid to ready a bare-bones bill for a vote by tomorrow to extend expanded unemployment benefits and tax cuts on family income up to $250,000.

In that scenario, Obama said on NBC, “Republicans will have to decide if they’re going to block it, which will mean that middle-class taxes do go up.” Any compromise needs to be passed by the Republican-controlled House of Representatives.

Today marks the first time since Oct. 29, 2000, that both the House and Senate cast votes on a Sunday, according to congressional records. The House has met on 16 Sundays since World War II, according to records of the House clerk and historian’s offices.

Democrats have insisted that the co-called chained CPI inflation yardstick be accompanied by a multiyear increase in the U.S. debt ceiling. The Republican-run House has used its authority over raising the debt ceiling to extract spending cuts from Democrats.

Obama agreed earlier this month to consider the new inflation gauge during budget negotiations with Boehner. After those talks halted, the focus has narrowed to a scaled-back plan in which Democrats and some Republicans say chained CPI has no place.

“That to me is not crucial at all, not at all at this stage,” said South Carolina Senator Lindsey Graham, a Republican.

Graham, a member of the Senate Armed Services Committee, said he had discussed the effect of the spending cuts on the U.S. military with Defense Secretary Leon Panetta last night and was told that it would mean 800,000 layoff notices at the beginning of the year. The result would be destroying “the finest military in the world at the time we need it the most,” he said.